How to i go through in answering the following questions

1. 'Neither empirical evidence nor theoretical logic offers any justification for the persistence of the dominant position of the kinked

demand curve as a model of oligopolistic behaviour.' Discuss this

statement, and consider whether alternative models of oligopoly

represent any advance on the kinked demand model.

2. Assess the view that privatisation can have little impact on the

behaviour of previously nationalised industries, since a state monopoly is simply replaced by a private one.

3. 'Attempting to learn how to make decisions is an exercise in futility.

All the most important decisions are made by people with little time

and even less information, acting on instinct.' Discuss.

4. Critically assess the relevance of the 'as if' principle used to justify the

reliance on profit maximisation as the working objective of the

modern business corporation.

340 Managerial Economics

5. (a) Evaluate the operational utility of demand elasticity estimates,

and outline any interpretational difficulties in the use of such

estimates.

(b) The annual demand function for a particular motor car is

estimated as:

D = 16000-10P/3+ Y2/1000

where D =annual demand, P =price in 's and Y =average

disposable income.

(i) Given that the retail price next year will be 12 000, whilst

average disposable income is expected to be 8000, estimate next year's annual demand. If the manufacturer

receives 80% of the retail price for each car sold, estimate

the manufacturer's revenue next year.

(ii) Find the retail price to maximise manufacturer's revenue

next year.

(iii) If the marginal cost per car is estimated to be 6000, find

the price to maximise profit next year.

(iv) In the subsequent year the retail price is expected to rise to

13 000, whilst incomes should increase by 5%. Estimate

demand and manufacturer's revenue for that year, and use

this information to estimate the price and income demand

elasticities.

6. 'There is a simple relationship between advertising and profitability:

the most profitable firms are the ones that advertise most. Therefore

advertising must increase profitability.' Discuss.

7. Critically examine the proposition that as the contemplated future

volume of output increases, the expected unit cost of output declines.

8. Recommend a price and marketing strategy for the established

automobile manufacturer seeking to enter the market for specialist

competition motorcycles. Compare your recommendations to those

for the automobile firm seeking to enter the volume small car market.

9. An engineering firm about to undertake a production run of 2000

items must decide whether to overhaul the production machinery.

Because the machinery is quite old, the cost of an overhaul is

uncertain. However, after the overhaul the failure rate for the

machinery is certain to be 0.01. Without the overhaul, the machinery

has a failure rate with the probability distribution given below. Each

defective item costs the firm 6 in hand finishing.

Failure rate Probability

0.01 0.5

0.02 0.2

0.03 0.1

0.04 0.1

0.05 0.1

Examination questions and answer notes 341

(a) Find the expected cost of overhaul that would make the riskneutral decision-maker indifferent between overhauling or not.

(b) The decision-maker decides to seek further information. Contact

with the machinery supplier suggests an overhaul is equally likely

to cost either 175 or 225, depending on the problems encountered. Moreover a sample run of 10 items is produced, resulting

in 2 defectives. Use this new information to re-assess the

overhauling decision.

(c) How would the decision be influenced by:

(i) the firm's precarious financial position;

(ii) the knowledge that the machinery is to be scrapped after

the next production run.

10. 'Opportunity cost is both subjective and speculative. As such the

concept of opportunity cost has no place in the scientific decisionmaking process.' Discuss.

11. (a) Briefly explain the significance of the firm's cost of capital. What

are the factors determining that cost of capital, and how can that

cost be estimated?

(b) Given that debt finance is generally cheaper than equity finance,

explain why the firm is unlikely to use solely debt finance to fund

expansion.

(c) A commodity broker is contemplating the acquisition of a new

computer-driven management information system (MIS). The

hardware for this would cost an initial 4 million, whilst software

and staff training would cost 1 million for each of the first two

years operation, and 200 000 per year thereafter. After six

years, the system would be due for replacement. However

scrapping the current (manual) system would save staff costs of

1.5 million each year.

To finance the new investment the broker would use a combination of debt and equity capital in the ratio 1:3. The broker can

borrow at an interest rate of 10%, whilst interest paid can be set

against the corporation tax liability (currently taxed at 30%).

The broker is a listed company with a current share price of

3.00, and current dividend of 15 pence. Over the period the

share price is expected to grow at an annual rate of 6%.

Use the above information to evaluate investment in the new

MIS, finding the net present value and internal rate of return on

that investment.

What other factors should the decision-maker take into account?